Kossan’s 1QFY22 core PATAMI of RM90.6m (-60% QoQ, -91% YoY) accounted for 28% and 27% of our and consensus projections. We deem the performance within our forecasts, as we expect Kossan to continue reporting weaker quarters ahead, owing to heightened competition and cost pressure. We make no changes to our earnings projections. Our SELL rating on Kossan is also maintained, with an unchanged TP of RM1.53, implying a PE valuation of 12.0x (at -0.5SD of its 5-year average) on its FY22f EPS of 12.7 sen.

Inline. Kossan’s 1QFY22 core PATAMI of RM90.6m (-60% QoQ, -91% YoY) formed 28% and 27% of our and consensus projections respectively. Core PATAMI was computed after adjusting for EIs amounting to c.-RM500k, predominantly made up of unrealised forex gains.

Dividend. None declared for the quarter (1QFY21: 12 sen).

QoQ. Given the falling sales volume (-5-10%), coupled with the effects of declining ASPs (-22-27%), Kossan’s revenue suffered a 25% drop. The decrease in sales volume was partially due to container shipping disruptions, given the ongoing supply chain challenges. In light of the rising costs and diminishing operating leverage, margins have continued to come under pressure, with EBIT margins narrowing 12ppts QoQ. On raw material prices, NBR prices declined by 30-35%, while NR prices were 18-20% higher (due to wintering season). All in, core PATAMI was 60% lower.

YoY. Revenue fell by 69%, as a result of lower sales volume (-22-27%) and continuous decline in ASPs (-35-40%). We believe the ongoing logistical challenges have contributed to the decline in Kossan’s sales volume, while the intensified competition from existing glove players and new entrants have continued to weigh down ASPs. During the quarter, NBR prices fell by 50-55%, while NR prices declined at a lower quantum of 7-9%. In tandem with the falling ASPs, EBIT margins were compressed by 45ppts and core PATAMI was subsequently down by 91%.

Outlook. In our opinion, the industry-wide headwinds faced are likely to persist in the near-term, as it would take time for the demand and supply imbalance to normalise. We understand that Kossan’s ASPs were still well above USD30 in 1QFY22, hence we think that there is still room for further ASP declines. Margins should also continue to come under pressure, given the expected increase operating costs in subsequent quarters (higher labour, utilities and chemical costs). It will be difficult for glove makers to pass on the entire cost increase this time around, due to the heightened competition. Prolonged lockdown in Shanghai that will likely choke the global supply chain further will also not augur well for local glove makers like Kossan, as it could potentially further exacerbate shipping woes.

Forecast. We keep our forecasts unchanged and we introduce our FY24f earnings forecasts.

Reiterate SELL, TP: RM1.53. We maintain our SELL rating on Kossan, with an unchanged TP of RM1.53. Our TP represents a PE valuation of 12.0x (at -0.5SD of its 5-year average) on its FY22f EPS of 12.7sen.

Source: Hong Leong Investment Bank Research - 28 Apr 2022